05 July 2007

Cabbages and Inflation

I scribble from time-to-time on inflation, and here, and indeed here (I am sure that I have written more, but that's all I could find with the limited time I was willing to spend), but never before have I blamed inflation on cabbages and carrots, useless wankers - yes, carrots and cabbages no.

If you were to take the predominant theme of my conversations over this week it is all inflation-based; oilfield services, Moscow and Podmoskovaya real estate (rental and acquisition), semi-skilled labour costs (see useless wankers), secretarial costs (and what the ugly coefficient is*). Whilst some might suggest that I should get out more a very rapid deceleration of my bicycle (to zero) on Sunday means getting out is painful and so inflation takes central place.

If cabbages and carrots, sale of Yukos assets are the central cause of inflation then I would suggest that practioners of the dismal science get out more and witness what is going on around them. Any suggestion that real inflation (you know the one that you and I pay) would be less than 12% this year is laughable.

* No way you could talk to headhunters about price differentials for beauty in anywhere else other than Russia - without getting fired that is.

Cabbage Cripples Central Bank’s Plans - Kommersant Moscow:Cabbage Cripples Central Bank’s Plans// Inflation in June is three times higher than a year agoThe unprecedented growth of prices on cabbage and carrot forced Russia’s Central Bank (CB) head Sergei Ignatiev to admit on Wednesday the tactic defeat in the struggle against inflation. Consumer prices index made up 1 percent in June 2007. In the annual estimation, it exceeded 8.5 percent, beating the CB’s and the government’s planned indexes of 7.5-8 percent. Analysts no longer believe in the deflation expected by the CB in August.Inflation is speeding up again. It reached 1 percent in June 2007. Last time, summer inflation was so high in 2001, while in June 2006 consumer prices growth made up 0.3 percent, which is over three times less than now. In the first half of 2007, consumer prices grew by 5.7 percent. From June 2006 to June 2007, inflation reached 8.5 percent, exceeding the Central Ban’s and the government’s planned upper limit of 8 percent, for the first time in several months. The Federal Statistics Service publishes the data on Thursday. Yet, Central Bank head Sergei Ignatiev spoke to the State Duma on Wednesday, announcing the data on inflation, and using expressions “unexpectedly”, “unfortunately”, “I cannot explain yet”, while presenting “The main directions of the monetary policy for 2008”.

Ignatiev said the inflation speed-up is mainly due to the growth of prices on fruit and vegetables. The prices grew by 12.2 percent in a month, by 38.6 percent since the year’s beginning, and by 16.2 percent since June 2006. The reason why vegetables affected the inflation index so much is their large share (40.2 percent) in the consumer goods basket, according to which the Statistics Service estimates the index. It reflects much better the consumption pattern of low-income citizens. Consequently, the inflation indexes are becoming more politically important several months before the elections. Prices on cabbage and carrot grew most, while prices on bread and sugar grew least of all.

Economists also say the situation with cabbage price is unexpected. Yaroslav Lissovolik of Deutsche UFG and Rory Macfarquhar of Goldman Sachs said the main reason of vegetable prices growth is the ban on using foreign labor, which came into force on April 1, 2007. However, Macfarquhar calls it an “isolated shock”, while Lissovolik is not sure this decision will not lead to a long-term speed-up in food prices growth.

The second reason of inflation growth, also mentioned by Ignatiev in the Duma, and to be discussed by all investment banks on Thursday, is the extremely high speed of money stock growth. It is close to 60 percent in annual estimation.

The Central Bank hopes that the money stock growth will slow down to 37-39 percent in the second half of 2007. Lissovolik does not believe in this prognosis, but confirms the trend: “Money stock growth was due to the influx of capital, caused by the sale of YUKOS assets and the IPOs of VTB and Sberbank. No large events like that are expected in the year’s second half.” Ignatiev gave a preliminary estimation on Wednesday: the private capital net flow made up $67 billion in the first semester of 2007, while the level of $70 billion is expected for the entire 2007 (after the prognosis had been reconsidered several times). It is possible only if the capital outflows by the year’s end.

Anton Struchenevsky of Troika Dialog named the same reasons, and said the “monetary factor played the main role” in the inflation upsurge. However, he believes the CB is counteracting inflation in a wrong way: “Strengthening the currency is a grave macroeconomic mistake. It only provokes the influx of capital. Monetary stock increases, inflation grows, creating a vicious circle.”

Yet, some economists are inclined to look for the reasons outside the monetary sphere. Dmitry Belousov of the Macroeconomic Analysis and Short-Term Prognosis Center acknowledges that “the situation is very strange”. However, he thinks “there are no reasons for inflation growth in the monetary sphere”. He said the price shock is “partially due to good weather and the arrival of newly grown vegetables to the market, partially – to the market reform, and partially – to the growth of vegetable prices in the world”.

Experts have different opinions on whether inflation will keep growing, and on how the Russian authorities will act if the deflation expected in July-August fails to take place. Goldman Sachs altered on Wednesday the inflation prognosis for 2007 from 8 percent to 8.3 percent. The bank’s report says that “Ignatiev’s intonation has changed”: now there is no confidence in his words that the 8-percent level will be reached. Deutsche UFG has not yet altered its 8.3-percent prognosis. However, Lissovolik said “it might be raised”. Troika Dialog is more optimistic, expecting a 7.5-8-percent inflation. Experts are not sure the CB’s hopes for August deflation are feasible.

The CB’s main tool for counteracting inflation is strengthening the ruble. The CB has already strengthened the ruble against the two-currency basket ($0.55+€0.45) twice in 2007, by 0.5 percent each time. Lissovolik expects it will strengthen the ruble by 1.5 percent more before the year’s end. Macfarquhar, referring to Ignatiev’s speech, said the ruble strengthening helps the inflation decrease with a six-month lag. “It has become more likely that the ruble will keep being strengthened further, especially if the inflation pressure is longer-term and more stable than it follows from Sergei Ignatiev’s statements,” the expert said.

So, the fate of Russia’s nationa currency directly depends on the further behavior of fruit and vegetables, and on the success of Russian IPOs before the end of 2007.

No comments:

05 July 2007

I scribble from time-to-time on inflation, and here, and indeed here (I am sure that I have written more, but that's all I could find with the limited time I was willing to spend), but never before have I blamed inflation on cabbages and carrots, useless wankers - yes, carrots and cabbages no.

If you were to take the predominant theme of my conversations over this week it is all inflation-based; oilfield services, Moscow and Podmoskovaya real estate (rental and acquisition), semi-skilled labour costs (see useless wankers), secretarial costs (and what the ugly coefficient is*). Whilst some might suggest that I should get out more a very rapid deceleration of my bicycle (to zero) on Sunday means getting out is painful and so inflation takes central place.

If cabbages and carrots, sale of Yukos assets are the central cause of inflation then I would suggest that practioners of the dismal science get out more and witness what is going on around them. Any suggestion that real inflation (you know the one that you and I pay) would be less than 12% this year is laughable.

* No way you could talk to headhunters about price differentials for beauty in anywhere else other than Russia - without getting fired that is.

Cabbage Cripples Central Bank’s Plans - Kommersant Moscow:Cabbage Cripples Central Bank’s Plans// Inflation in June is three times higher than a year agoThe unprecedented growth of prices on cabbage and carrot forced Russia’s Central Bank (CB) head Sergei Ignatiev to admit on Wednesday the tactic defeat in the struggle against inflation. Consumer prices index made up 1 percent in June 2007. In the annual estimation, it exceeded 8.5 percent, beating the CB’s and the government’s planned indexes of 7.5-8 percent. Analysts no longer believe in the deflation expected by the CB in August.Inflation is speeding up again. It reached 1 percent in June 2007. Last time, summer inflation was so high in 2001, while in June 2006 consumer prices growth made up 0.3 percent, which is over three times less than now. In the first half of 2007, consumer prices grew by 5.7 percent. From June 2006 to June 2007, inflation reached 8.5 percent, exceeding the Central Ban’s and the government’s planned upper limit of 8 percent, for the first time in several months. The Federal Statistics Service publishes the data on Thursday. Yet, Central Bank head Sergei Ignatiev spoke to the State Duma on Wednesday, announcing the data on inflation, and using expressions “unexpectedly”, “unfortunately”, “I cannot explain yet”, while presenting “The main directions of the monetary policy for 2008”.

Ignatiev said the inflation speed-up is mainly due to the growth of prices on fruit and vegetables. The prices grew by 12.2 percent in a month, by 38.6 percent since the year’s beginning, and by 16.2 percent since June 2006. The reason why vegetables affected the inflation index so much is their large share (40.2 percent) in the consumer goods basket, according to which the Statistics Service estimates the index. It reflects much better the consumption pattern of low-income citizens. Consequently, the inflation indexes are becoming more politically important several months before the elections. Prices on cabbage and carrot grew most, while prices on bread and sugar grew least of all.

Economists also say the situation with cabbage price is unexpected. Yaroslav Lissovolik of Deutsche UFG and Rory Macfarquhar of Goldman Sachs said the main reason of vegetable prices growth is the ban on using foreign labor, which came into force on April 1, 2007. However, Macfarquhar calls it an “isolated shock”, while Lissovolik is not sure this decision will not lead to a long-term speed-up in food prices growth.

The second reason of inflation growth, also mentioned by Ignatiev in the Duma, and to be discussed by all investment banks on Thursday, is the extremely high speed of money stock growth. It is close to 60 percent in annual estimation.

The Central Bank hopes that the money stock growth will slow down to 37-39 percent in the second half of 2007. Lissovolik does not believe in this prognosis, but confirms the trend: “Money stock growth was due to the influx of capital, caused by the sale of YUKOS assets and the IPOs of VTB and Sberbank. No large events like that are expected in the year’s second half.” Ignatiev gave a preliminary estimation on Wednesday: the private capital net flow made up $67 billion in the first semester of 2007, while the level of $70 billion is expected for the entire 2007 (after the prognosis had been reconsidered several times). It is possible only if the capital outflows by the year’s end.

Anton Struchenevsky of Troika Dialog named the same reasons, and said the “monetary factor played the main role” in the inflation upsurge. However, he believes the CB is counteracting inflation in a wrong way: “Strengthening the currency is a grave macroeconomic mistake. It only provokes the influx of capital. Monetary stock increases, inflation grows, creating a vicious circle.”

Yet, some economists are inclined to look for the reasons outside the monetary sphere. Dmitry Belousov of the Macroeconomic Analysis and Short-Term Prognosis Center acknowledges that “the situation is very strange”. However, he thinks “there are no reasons for inflation growth in the monetary sphere”. He said the price shock is “partially due to good weather and the arrival of newly grown vegetables to the market, partially – to the market reform, and partially – to the growth of vegetable prices in the world”.

Experts have different opinions on whether inflation will keep growing, and on how the Russian authorities will act if the deflation expected in July-August fails to take place. Goldman Sachs altered on Wednesday the inflation prognosis for 2007 from 8 percent to 8.3 percent. The bank’s report says that “Ignatiev’s intonation has changed”: now there is no confidence in his words that the 8-percent level will be reached. Deutsche UFG has not yet altered its 8.3-percent prognosis. However, Lissovolik said “it might be raised”. Troika Dialog is more optimistic, expecting a 7.5-8-percent inflation. Experts are not sure the CB’s hopes for August deflation are feasible.

The CB’s main tool for counteracting inflation is strengthening the ruble. The CB has already strengthened the ruble against the two-currency basket ($0.55+€0.45) twice in 2007, by 0.5 percent each time. Lissovolik expects it will strengthen the ruble by 1.5 percent more before the year’s end. Macfarquhar, referring to Ignatiev’s speech, said the ruble strengthening helps the inflation decrease with a six-month lag. “It has become more likely that the ruble will keep being strengthened further, especially if the inflation pressure is longer-term and more stable than it follows from Sergei Ignatiev’s statements,” the expert said.

So, the fate of Russia’s nationa currency directly depends on the further behavior of fruit and vegetables, and on the success of Russian IPOs before the end of 2007.